WEBVTT - Markets Weekly: Japan’s Bond Shock and the Global Ripple Effect

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<v Speaker 1>Bloomberg Audio Studios, Podcasts, Radio News. Welcome to the Merrin

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<v Speaker 1>Dogs Money Market Rap. What we talk about the biggest

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<v Speaker 1>moves of the markets this week and what is driving them.

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<v Speaker 1>I'm Maren Zumset, Web Editor at Large with Bloomberg UK Wealth, and.

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<v Speaker 2>I'm joined Stevig, senior reporter of Bloomberg and author of

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<v Speaker 2>the Money Distilled newsletter.

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<v Speaker 1>Okay, well, John, when we talk about what's driving the

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<v Speaker 1>moves and market this week, I had much doubt there. I

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<v Speaker 1>will say before we get going that you and I

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<v Speaker 1>are speaking before President Trump speaks at Davils.

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<v Speaker 2>Yes.

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<v Speaker 1>So he's been saying a lot of things this week,

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<v Speaker 1>a lot of social media on the go, a lot

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<v Speaker 1>of messages, a lot of publishing of other people's messages,

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<v Speaker 1>a lot going on. But he hasn't actually spoken yet,

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<v Speaker 1>so there may be some fairly massive market moves when

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<v Speaker 1>he is finished speaking.

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<v Speaker 2>Yeah, and he has been a busy boy this WEEKO.

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<v Speaker 2>Actually he's not the only thing moving markets. Ess. Actually,

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<v Speaker 2>Japanese election promises that have been moving markets in quite

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<v Speaker 2>an extraordinary way. At the star of the way.

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<v Speaker 1>It's interesting, isn't it. And you might think looking around

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<v Speaker 1>the world geopolitically that the most important thing would be

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<v Speaker 1>the idea that America might annex Greenland against against the

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<v Speaker 1>will of the rest of the world. But in fact

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<v Speaker 1>Japanese bond yills have had more impacted.

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<v Speaker 2>I think that's it's probably what's starting, isn't then we

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<v Speaker 2>can talk about Trump because because what happened in Japan

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<v Speaker 2>is the Japanese bord market yields spiked because the Japanese

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<v Speaker 2>Prime minister, they has called the snap election to show

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<v Speaker 2>up her power, clearly hasn't spoken to trees amazing, hasn't.

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<v Speaker 1>Seen what happens with elections elsewhere. But anyway we go, and.

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<v Speaker 2>Of course you need to bribe the electorate whenever you're

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<v Speaker 2>going to go for an election. And one of the

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<v Speaker 2>hard particular choice has been to say, we'll look for

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<v Speaker 2>the next two years, we're going to knock off the

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<v Speaker 2>equivalent you know, Japanese vat the sales tax on food,

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<v Speaker 2>so it's currently eight percent to zero percent. The thing is,

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<v Speaker 2>obviously Japan has got a massive kind of date to

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<v Speaker 2>GDP ratio and markets are sort of going, well, wait

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<v Speaker 2>a minute, how are you going to pay for this?

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<v Speaker 2>And she's sort of saying, well, we're not going to

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<v Speaker 2>have to issue more points to pay for it, but

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<v Speaker 2>she doesn't actually said how they will pay for it.

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<v Speaker 2>And the other thing is that the opposition parties, no

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<v Speaker 2>one's saying, well, that's a really daft idea, that's really expensive. Instead,

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<v Speaker 2>they're all competing to say make even greater promises, so, well,

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<v Speaker 2>you'll scrap it for two years, we will scrap it

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<v Speaker 2>for good or I hope we actually cut the entire

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<v Speaker 2>V eighty and a half from ten percent to five percent,

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<v Speaker 2>and so there's this sort of almost arms race.

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<v Speaker 1>Yeah. Well, it's interesting, isn't it that the natural state

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<v Speaker 1>of a democracy is generally inflationary, right, Yeah, yeah, I

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<v Speaker 1>was reading reading about this the other day. You know

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<v Speaker 1>that that democracy is naturally inflationary, but the point was

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<v Speaker 1>that capitalism is naturally deflationary. Capitalism tends to bring prices

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<v Speaker 1>of stuff down over time, and so there's a conant

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<v Speaker 1>tension across all types of capitalist democracies between the democracy side,

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<v Speaker 1>which is inflationary, and the capitalist side, which is deflationary.

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<v Speaker 1>And that deflationary side has been winning in Japan for

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<v Speaker 1>a long time. Yeah, but now the naturally inflationary side

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<v Speaker 1>of a democratic society is rising to before.

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<v Speaker 2>Yeah, and that is you know, that's really freaking people

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<v Speaker 2>out because you know, by by other standards I supposed

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<v Speaker 2>to Japanese inflation isn't that high or certainly not compared

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<v Speaker 2>to what we've got used to. I mean, that is

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<v Speaker 2>actually an interesting point because I think the problem with

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<v Speaker 2>any form rule actually is that if you're if your

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<v Speaker 2>economy stops functioning properly, then you your way to keep

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<v Speaker 2>the vested interests and the people happy is always inflationary.

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<v Speaker 2>Ancient Rome was not a democracy, but it's still kind

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<v Speaker 2>of destroyed itself through currency debasement and hyperinflation. So I

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<v Speaker 2>don't I like to defend democracy. There are too many

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<v Speaker 2>people who are against it at the moment, and I'm

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<v Speaker 2>a bit kind of worried about that.

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<v Speaker 1>Everybody in the studio here is pro democracy with the producer. Yeah,

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<v Speaker 1>we're all good, So.

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<v Speaker 2>You can leave that. Yeah, so may the Japanese point

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<v Speaker 2>you'll spiked, Like the forty years went above four percent

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<v Speaker 2>for the first time ever. I mean, okay, they were

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<v Speaker 2>only I should In two thousand and seven, Japanese ten

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<v Speaker 2>years went above two percent, which we haven't seen for decades,

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<v Speaker 2>and it kind of spell over into the rest of

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<v Speaker 2>the market as well, and so you know, it's just

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<v Speaker 2>another reminder of the you know, bondiel trajetary political risk premia,

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<v Speaker 2>and that all obviously Greenland feeds into that, the kind

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<v Speaker 2>of chaos, if you like, feeds into that.

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<v Speaker 1>Rising bondy els in Japan affect the rest of the world, right, Yes,

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<v Speaker 1>they push up bondials everywhere a little bit, and also

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<v Speaker 1>create the risk that capital that has long been flowing

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<v Speaker 1>out of Japan looking for high yells both back into

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<v Speaker 1>Japan because you can get the yield there, and that

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<v Speaker 1>pulled capital of all of our economies and could have

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<v Speaker 1>as yet unknown effects.

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<v Speaker 2>Yeah, definitely. I mean, in August twenty twenty four there

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<v Speaker 2>was a big kind of surprise crash in the market,

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<v Speaker 2>and that was driven by this same thing, basically the

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<v Speaker 2>reversal of the yen carry trade. And one thing that's

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<v Speaker 2>interesting I know that. I mean, I think we both

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<v Speaker 2>get the BCA research. I remember the chap they're pointing

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<v Speaker 2>out that basically the mag seven stocks had kind of

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<v Speaker 2>moved in Tangent where I think it was basically the yen. Yeah,

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<v Speaker 2>and so one of the big trades that Japanese investors.

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<v Speaker 2>Basically the Japanese money going for sas a lot of

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<v Speaker 2>that has been invested in MAG seven kind of big

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<v Speaker 2>US stocks. So probably the US market is the place

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<v Speaker 2>to kind of watch for any reaction because a lot

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<v Speaker 2>of people are now saying, well, actually Japanese government bonds

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<v Speaker 2>look good valuing there because the yields are much higher

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<v Speaker 2>than they were. If you buy any then, particularly if

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<v Speaker 2>you think the en going to appreciate, then actually trying

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<v Speaker 2>not a bad place to buy g GPS. And so

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<v Speaker 2>once that sort of happens, or enough people think it's

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<v Speaker 2>going to happen, then yeah, you might see a whole

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<v Speaker 2>lod of the money sucked out of the U S stop

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<v Speaker 2>marketing back in the Japanese government.

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<v Speaker 1>I mean, I think give it on your Meg seven point.

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<v Speaker 1>I think it's worth noticing that the nurserk is down

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<v Speaker 1>on the air already.

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<v Speaker 2>Yeah yeah, down one point.

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<v Speaker 1>Yeah, quite big fool yesterday.

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<v Speaker 2>So yeah maybe well yeah, well, I think it's interesting

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<v Speaker 2>because people again sort of blame that well, the story

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<v Speaker 2>is that this is all because you know, Trump is

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<v Speaker 2>going to you know, saper rattling over greenline. Notice, but

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<v Speaker 2>actually it is probably get more to do with the

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<v Speaker 2>tec tonic plates shifting because of the kind of you know,

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<v Speaker 2>what's happening in the boind market exactly.

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<v Speaker 1>I mean, there is this conversation going on in Europe

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<v Speaker 1>going or we can retaliate because you know, Europe has

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<v Speaker 1>a trillion dollars worth of bonds and equities and we're

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<v Speaker 1>going to divest and we're going to going to that.

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<v Speaker 1>And then there is a suggestion that this dynamic is

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<v Speaker 1>is already happening, which I suspect it isn't. Although we

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<v Speaker 1>would expect a constant rebalancing away from the US, wouldn't

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<v Speaker 1>We look here and the US market hitting kind of

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<v Speaker 1>seventeen percent or sixty seven point of the global index.

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<v Speaker 1>I suspect that peaked at the end of last year. Yes,

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<v Speaker 1>the rebalancing will be fairly consistent for the next decade.

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<v Speaker 2>Definitely, I mean I think that, you know, I mean,

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<v Speaker 2>that's all this all helps with the rest of the

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<v Speaker 2>world catch up story to the US, which should have

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<v Speaker 2>happened anyway, because it's kind of crazy that so much

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<v Speaker 2>global capital as in the US is way more than

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<v Speaker 2>it always represents sensible diversification apart from anything else. So

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<v Speaker 2>definitely mean, obviously Trump is a catalyst for that, but

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<v Speaker 2>it's a move that has been on the cards for

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<v Speaker 2>a long time. And none of that is to defend

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<v Speaker 2>you know, Trump's specific actions or a specific style one

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<v Speaker 2>way or the other.

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<v Speaker 1>But you don't have to that, you know how everybody

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<v Speaker 1>every conversation we have with them, with everybody, but anyone

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<v Speaker 1>who says anything about anything to do with Rum, they

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<v Speaker 1>have to preface it was saying I'm not defending but exactly.

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<v Speaker 2>But you know boys cream, Yeah exactly. So I think

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<v Speaker 2>that's I think that's one thing we can actually quite

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<v Speaker 2>comfortably say on Wednesday before Trump stands up. Has been

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<v Speaker 2>a big driver on PLOYM well, continue to be a

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<v Speaker 2>big driver, not just this week. And then there's Gold. Yeah, God,

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<v Speaker 2>it's just kind of bond calls John Silver and Silver,

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<v Speaker 2>I mean don't even don't even go. And I mean

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<v Speaker 2>Silver's like when sniffing doesn't the one hundred dollars announced Now,

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<v Speaker 2>I never thought i'd see that.

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<v Speaker 1>I'm back excited we were when I went through fifty, Yes,

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<v Speaker 1>and we can leave it. When I went through seventy,

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<v Speaker 1>I thought, what are we going to do when it

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<v Speaker 1>goes through a hundred. Why don't I own any is

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<v Speaker 1>my main question. Yeah, big coin gold.

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<v Speaker 2>We've got gold. I've got some gold, Okay, thank goodness, goodness.

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<v Speaker 2>I kind of talked to it all this time, and

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<v Speaker 2>we have been talking.

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<v Speaker 1>About gold and so for a long time. So I

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<v Speaker 1>do hope that readers went and had a a little

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<v Speaker 1>look at their portfolio. And of course now it's impossible

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<v Speaker 1>to say what will happen next with gold and so

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<v Speaker 1>over the basement, trade, geopolitics going nuts or canggoriz, things.

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<v Speaker 2>Happening one thing, and I texted you. But this morning,

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<v Speaker 2>like said, Mark Canny, gave a speech, and Mark Canny

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<v Speaker 2>is probably almost the epitome of davorce Man amongst politicians,

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<v Speaker 2>I think, and he was saying essentially that okay, everyone

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<v Speaker 2>forget that the old rules based orders is dead. And

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<v Speaker 2>I do not know what nature of contry and indicator

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<v Speaker 2>that is, but I feel that it's a It represents

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<v Speaker 2>a peak of something, you know, answers on the postcard

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<v Speaker 2>from any license, but.

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<v Speaker 1>It probably represents the final turning point for economies back inwards,

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<v Speaker 1>where they start re industrializing, start really focusing on energy, security,

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<v Speaker 1>on security, on all these things that we've been talking

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<v Speaker 1>about for ages, and if you look at the investment

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<v Speaker 1>implications of that, just screams commodity super psycho.

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<v Speaker 2>Oh mean it does, say, because if everyone needs to

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<v Speaker 2>build their own stock pails up having run them down,

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<v Speaker 2>because we all bought into what we're now told was

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<v Speaker 2>a potentk in village of you know, can winter banes

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<v Speaker 2>and sawder panels and everyone's lovey dovey to each other,

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<v Speaker 2>and anyone who objected to that was an idiot.

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<v Speaker 1>But right now, Trump's administration said at Dabors yesterday, I

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<v Speaker 1>think what is up with Europe wanting to hit at

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<v Speaker 1>zero by twenty thirty when they don't make any batteries. Yeah,

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<v Speaker 1>so if you want that, you're going to need to

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<v Speaker 1>build an awful lot of battery factories, or buy a lot.

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<v Speaker 2>Of oil, or buy a lot of oil or right

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<v Speaker 2>cool north Sea by cool, we still get plenty of

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<v Speaker 2>coll and Brenon.

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<v Speaker 1>Okay, it's part of getting too old fashioned for comfort,

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<v Speaker 1>John Ald is the idea of money flowing out of

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<v Speaker 1>the US and rebalancing of assets around the world. It

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<v Speaker 1>has got to be good for the UK. Right We're

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<v Speaker 1>still what the third largest stock market in the world,

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<v Speaker 1>still over three percent of global equity market capitalization right

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<v Speaker 1>here in London, biggest stock market in Europe, etc. And

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<v Speaker 1>of course the FOTSI one one hundred last year was

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<v Speaker 1>the best performing asset, the fourth best performing asset globally

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<v Speaker 1>in dollar terms. So if you're looking to move money

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<v Speaker 1>out of the US, you might think to yourself, well,

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<v Speaker 1>do you know the Footy one hundred doesn't look too bad,

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<v Speaker 1>particularly given all those minus and all that old fashioned

0:11:33.640 --> 0:11:36.720
<v Speaker 1>stuff that nobody ever wanted before they may now want.

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<v Speaker 1>And the rally last year is very concentrated, A large

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<v Speaker 1>part of the gains came from very few stocks, lots

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<v Speaker 1>of scope for that broaden out, lots of scope for

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<v Speaker 1>it even to drop down below the Footze one hundred.

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<v Speaker 1>So while obviously all markets are off this week so far,

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<v Speaker 1>it does seem that is going to be rebalancing out

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<v Speaker 1>of the US into other markets. The UK, while we

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<v Speaker 1>are still saddled with it with a government that doesn't

0:11:59.160 --> 0:12:02.280
<v Speaker 1>quite get it, may do really well.

0:12:02.679 --> 0:12:05.400
<v Speaker 2>Yeah, I'd absolutely agree. I mean, you're right, if you're

0:12:05.400 --> 0:12:07.920
<v Speaker 2>going to diversify the biggest stock market, the first place

0:12:07.960 --> 0:12:10.440
<v Speaker 2>you look is the next couple of ones down on

0:12:10.520 --> 0:12:13.920
<v Speaker 2>the MSc High Global you know, track cal point and yeah,

0:12:13.960 --> 0:12:16.680
<v Speaker 2>the UK is there in Japan's they are basically and interestingly,

0:12:16.679 --> 0:12:20.400
<v Speaker 2>both of them have got relatively weak currencies compared to

0:12:20.559 --> 0:12:24.320
<v Speaker 2>their history, so anyone who is an overseas investor can

0:12:24.360 --> 0:12:26.000
<v Speaker 2>be looking at that and saying, well, I say I

0:12:26.080 --> 0:12:29.440
<v Speaker 2>make a bump from the currency as well. So yeah, no,

0:12:29.480 --> 0:12:32.360
<v Speaker 2>I think that I think the UK market in general

0:12:32.440 --> 0:12:35.480
<v Speaker 2>is probably in good shape for the year ahead.

0:12:35.760 --> 0:12:37.839
<v Speaker 1>Yeah, and I say that we have a government that

0:12:37.880 --> 0:12:40.360
<v Speaker 1>doesn't quite get it, but I think actually they're all

0:12:40.400 --> 0:12:42.040
<v Speaker 1>beginning to get it. You know. There were some reforms

0:12:42.080 --> 0:12:45.120
<v Speaker 1>announced the beginning of this week to listing rules, etcetera,

0:12:45.200 --> 0:12:48.360
<v Speaker 1>and make it easier for retail investors to participate in

0:12:48.440 --> 0:12:51.640
<v Speaker 1>ips and secondary listings, so that there is movement here.

0:12:52.000 --> 0:12:53.800
<v Speaker 2>There is good and actually and I think it's good.

0:12:53.840 --> 0:12:56.959
<v Speaker 2>I mean the stuff about kind of points being more

0:12:56.960 --> 0:12:59.400
<v Speaker 2>open to retail investors as well. So from from that

0:12:59.440 --> 0:13:03.640
<v Speaker 2>point of view, I do think somebody gets somewhere, And

0:13:03.800 --> 0:13:05.600
<v Speaker 2>the main reason they keep it quiet is because they

0:13:05.679 --> 0:13:09.320
<v Speaker 2>know the core voter base is futurely suspicious to capitalism

0:13:09.320 --> 0:13:12.040
<v Speaker 2>and anything that makes it easier. But so those are

0:13:12.120 --> 0:13:14.640
<v Speaker 2>good things, and yeah, I mean it's weird, but yes,

0:13:14.679 --> 0:13:17.240
<v Speaker 2>I think you can probably be quite upbeat on UK

0:13:17.400 --> 0:13:19.800
<v Speaker 2>markets outlook for this year.

0:13:19.880 --> 0:13:31.920
<v Speaker 1>Certainly anything else we should add, keep a very close

0:13:31.920 --> 0:13:36.839
<v Speaker 1>eye on Japan, keep it on Trump, watch Greenland, and

0:13:37.200 --> 0:13:40.240
<v Speaker 1>pretty much everything that we've been talking about here for

0:13:40.320 --> 0:13:43.320
<v Speaker 1>some time is coming to fruition. Not necessarily in the

0:13:43.320 --> 0:13:44.319
<v Speaker 1>way that one would have liked.

0:13:45.200 --> 0:13:47.600
<v Speaker 2>Yeah, but at least it's good for the investments that

0:13:47.600 --> 0:13:48.760
<v Speaker 2>we thought it would be good for.

0:13:48.920 --> 0:13:57.440
<v Speaker 1>That's true, silver Linings, John silver Linings, thanks for listening

0:13:57.440 --> 0:13:59.840
<v Speaker 1>to this week's Maren Talks Money Debrief. If you like

0:13:59.880 --> 0:14:02.600
<v Speaker 1>a show, rate review, and subscribe whereever you listen to podcasts,

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